Decentralized Finance (DeFi) - What Is It?

Decentralized Finance, in short DeFi, is a concept which enables entrepreneurs who choose to take advantage of blockchain technology and traditional financial instruments in a decentralized architecture. Two examples of DeFi applications are Bitcoin and Ethereum. They are both controlled by big networks of computers and not central authorities.

DeFi stands for decentralized finance — it is quite a wide term for various financial applications in blockchain and cryptocurrency. These applications may be used to execute financial transactions without the control on the part of central institutions. Simply put, it is about cutting out the middleman such as a bank from the transaction and conducting transactions over the blockchain instead.

DeFi apps leverage smart contracts — pieces of code that perform particular actions when individually defined conditions are met. Through these technologies, users may lend and borrow cryptocurrencies without intermediaries.

DeFi applications consist of three main elements: a front-end interface in the form of an application or website, a smart contract that stores programmed conditions, and the Ethereum blockchain that enables and secures transactions.

Generally, DeFi applications run on the Ethereum blockchain. Developers use special Ethereum programming languages such as Solidity to build and deploy smart contracts. Related concepts include yield farming, liquidity mining, composability, and money legos — where DeFi applications can be combined like building blocks to create new functional financial products.

There are risks to consider. Poorly written smart contract code can be dangerous for users. The value of cryptocurrencies is very unstable. There is no central authority providing customer service or support. Borrowers cannot be held accountable through traditional regulatory means.

DeFi applications include decentralized exchanges for currency exchange, lending platforms using smart contracts, stablecoins tied to traditional assets for price stability, and prediction markets for betting on future events without intermediaries. DeFi surely has considerable business potential for those who understand the risks.